What a difference 'A Day' makes ?

A-Day - what does it all mean?

'A Day' is the term used to describe the date - 6 April 2006 - when new pension legislation came into effect. If you already have a private or company pension then you should learn about the changes as you may need to take action and could lose out if you don't.

Why does it matter?

It could help you save more and it will provide flexibility because the rules will make pensions less complicated and stiff. If you already have a pension then find out about the changes - you may need to take action and could lose out if you don't.

How much more can I save?

The new rules allow you to be a member of your company scheme and pay into a personal pension at the same time. Previously, only those earning less than £30,000 a year could do this. You will also be able to draw your pension and carry on working if you choose or need to. Maximum annual contributions have also been increased - you can now invest an amount equivalent to either your entire annual earnings, or £215,000, whichever is lower, every year.

What about the tax breaks?

Savers will continue to enjoy the same tax breaks - for every £78 you invest in a pension, the Inland Revenue will top up your contribution by £28 (effectively a refund of the 22% tax you've already paid). If you're a higher-rate taxpayer, the taxman will let you claim the extra 18% too (40% minus the 22% he's already given you) through your tax return. This money is not paid into your pension plan, but instead refunded to you. Any funds or assets within your pension plan are allowed to grow tax-free; since returns from most investments from shares to bank interest can be taxed at up to 40%, this concession is very valuable

What is the lifetime allowance?

A new lifetime allowance is being introduced, which will cap the total value of individual pensions at £1.5m from April 2006, rising to £1.8m by 2011. Anything in your fund that exceeds the limit at the time of your retirement will be taxed at a massive 55%.

If you are one of the lucky people to have already exceeded this limit you should take steps to protect your money. There are two options and you can register for them until 2009. If you have pensions savings already worth more than £1.5m, you can register for 'primary protection'. This will protect you from the 55% recovery tax and also allow you to top up your fund by the equivalent percentage increase in the Lifetime Allowance in the years leading up to your retirement. The alternative is to register for 'enhanced protection', which may be useful if your fund is currently below the £1.5m limit but you expect it to grow substantially above the ceiling by the time that you retire.

I've heard something about a lump sum - when can I take it?

For the first time, savers aged over 50 - and from 2010 those over 55 - will be able to take a tax-free lump sum from their schemes without having to retire or draw an income from the remainder of their fund.

The new rules will also allow you to take some pension income while continuing to work part-time if you choose. This is designed to allow a more gradual transition from work to retirement. But if your pension fund does offer full flexibility, think carefully about what you are giving up by taking the lump sum. Once you have taken the lump sum from your fund it is gone for good and you cannot take another 25% from that part of your pension in the future.

Will this affect my retirement age?

The minimum age at which you can start taking your private or company pension will be raised from 50 to 55 by April 2010. If you belong to an occupational scheme that has given you the right to retire at 50, you still can.

What about the lump sum I get when I retire?

The compulsory requirement to take an annuity by age 75 will no longer exist. Instead you will have the option of taking an Alternative Secured Income which could enable you to pass on any unused pension after your death. But you will still have to take an annual income from your fund, which will then by taxed. The minimum amount will be £1 a year and the maximum will be linked to annuity rates. It was announced in the 2006 Budget that pension funds which are not used to buy an annuity would be subject to inheritance tax.

There will also be two new types of annuity - the Limited Period Annuity and the Value Protected Annuity. The former lasts for just five years, after which time you can buy another one, or a normal lifetime annuity. The latter will pay out any unused amount to your heirs, but you'll get a lower income than a normal annuity.

I have already retired, is there anything I should know about?

Over-75s may want to consider the option of an 'alternative secured pension', allowing any residual pension on death to be left to heirs. The residual pension will have to be inherited by family members who are in the same pension scheme - and it can also only be passed on if there is no surviving spouse. It is also liable to inheritance tax (IHT) at 40 per cent of any amount over pounds 285,000.

Is it true I can invest in residential property now?

Unfortunately not. At one stage it was announced that there was to be a relaxation in the rules as to what you could invest your pensions contributions in. Most of the excitement was over the option to include residential property in your pension, but the Chancellor changed his mind on this before A-Day. Along with residential property, other more exotic forms of investment such as art and fine wine will now remain outside the list of assets you can include in your pension.

Do these changes mean that the UK pension crisis will be solved?

Unfortunately they will not be a magic wand. We are all living longer and are likely to need to work longer so the added flexibility will help. But last year's report by the government's Pensions Commission concluded that the UK's pensions problem is both deep-rooted and long-term. If you have concerns about your own pension, speak to your employer and take advice from an independent financial adviser. Read more about the historic and ongoing problems with our pension system in Martin Campbell's articles.